Collaborative Contracting – An Introduction

In this blog we explore what collaborative contracting is and how collaborative contracts differ from transactional contract approaches.  The term ‘collaborative contract’ is a relatively recent term that has evolved from many decades of research, practice, and experiences with ‘relational contracts’, a term coined by Stewart Macaulay and Ian MacNeill in the 1960’s.[1]  In this discussion, substance is far more import than form and it immediately becomes apparent that there are no substantive differences between relational contracts and collaborative contracts, thus we can treat the two terms as synonymous.

The importance of collaborative contracting should not be understated. As business relationships increasingly demand greater agility and organisations face increasing complexity, contracts that attempt to exhaustively deal with all risks and opportunities are unlikely to be successful. The 2016 Nobel Prize in Economics was awarded to Oliver Hart for his pioneering studies into ‘incomplete contracts’, recognising the significant limits of conventional approaches as follows:

“It may be extremely costly to write a contract that specifies unambiguously the payments and actions of all parties in every observable state of nature.” [2]

Several definitions of collaborative contracting are available and they all place emphasis on parties working together to achieve common goals. The Australian Department of Defence, Capability Acquisition and Sustainment Group Collaborative Contracting Better Practice Guide offers a useful definition by capturing the most common themes of collaboration:

“Collaborative contracting is where parties work together to achieve common outcomes. Collaborative contracts are underpinned by parties working together in good faith, focussing on fixing problems and not blame, managing risk equitably and jointly where appropriate, promoting transparency, and avoiding disputes.”

It is important to recognise that there is no magical threshold by which a transactional contract suddenly becomes a collaborative one, and vice versa. Rather, there will be features and relationships in commercial dealings that lie upon the spectrum of collaborative contracting approaches, with discrete ‘one-off’ contracts at one end of the spectrum[3] and highly integrated alliance contracts or joint ventures at the other end of the spectrum. There will always be some level of relationship or collaboration though in all commercial dealings as observed by Eisenberg:

“Discrete contracts – contracts that are not relational – are almost as imaginary as unicorns”.[4]

We should also recognise that collaboration is not just an activity between buyers and suppliers. ISO 44001 Collaborative Business Relationships highlights the fact that collaboration also occurs within organisations (internal collaboration) and this is equally important to drive the necessary enterprise collaborative behaviours.  Furthermore, collaboration does not just apply to acquisition activities. Collaboration applies to the complete ‘strategic lifecycle’ of organisations[5] which includes sustainment, research and development, and disposal. This latter perspective is of importance since the scope of collaboration may need to adjust throughout the contract lifecycle.

To effectively frame the comparison between transaction and collaborative contracts, we need to explore the features of transactional contracts. Transactional or classical contracts place an emphasis on arms-length relationships, risk allocation (typically to suppliers), a focus on price competition, several liability, and reliance upon litigation to settle disputes. These forms of contract are often best suited for one-off, short term activities that do not require flexibility. These forms of contract also attempt (often unsuccessfully) for completeness, whereby the contract attempts to cater for all plausible eventualities. What then are the features of a collaborative contract?

Whilst the term ‘collaborative contracting’ is partly self-defining, there are several features that often apply to collaborative contracts as follows:

  1. senior executive commitment and strong leadership;
  2. joint decision making;
  3. partnering charters;
  4. equitable risk allocation and sharing (e.g. target cost or gainshare/painshare remuneration);
  5. no blame/no-liability frameworks;
  6. transparency and open book financial reporting;
  7. fair and timely dispute resolution processes;
  8. agility and flexibility; and
  9. shared systems.[6]

A key issue here is that it is not just the contract terms and conditions that contribute to collaborative outcomes but also the broader commercial relationship including leadership, culture, attitudes, environment, and systems applicable to the activity at hand. Focussing on the contract alone will not likely drive the desired collaborative behaviours. In particular, leadership is of paramount importance as identified by the United Kingdom National Audit office:

Every case study ranked leadership as the most important factor in developing collaborative relationships.[7]

When exploring the use of collaborative contracting, it is not necessary to pursue all the elements listed above, noting that collaboration is not a binary construct, collaboration exists across a spectrum. We should never treat collaboration as “all or nothing”.  For example, a transactional or classical contract may adopt some partnering principles as well as timely and equitable disputes resolution process, akin to ‘neo-classical contracts’.[8] The more radical features such as no blame/no liability frameworks would only be pursued for highly collaborative relationships.

As we have seen, driving the right behaviours is not just an exercise in drafting suitable terms and conditions within the head contract. Achieving a collaborative framework requires a far more holistic view to ensure that parties have a mutual understanding of the desired end-states and a shared vision of success. This requires cultural alignment and leadership to drive the right outcomes. The effort and time required to achieve this alignment should not be underestimated.

Future blogs in this series will explore when and when not to pursue collaborative contracting and provide relevant case studies of how collaborating can drive superior outcomes.

[1] Stewart Macaulay, ‘Non-contractual relations in Business: A Preliminary Study’ American Sociological Review 28 (1) (1963), 55-67.

[2] Grossman, Sanford J., and Oliver D. Hart. 1986 ‘The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy’ 94(4): 691-719, 695

[3] Ian McNeill ‘The New Social Contract’ (1980).

[4] M. Eisenberg ‘Why there is No Law of Relational Contract’ 94 Nw. U. L. Rev. 805 (2000)

[5] ISO 44001:2017  Collaborative Business Relationship Management Systems – Requirements and Framework (2017) p vii

[6] Adapted from CASG Better Practice Guide ‘Collaborative Contracting’ (2017).

[7] UK NAO Good Governance ‘Measuring Success Through Collaborative Working Relationships’ (2006) p 8.

[8] Ian McNeill ‘Contracts: Adjustment of Long-Term Economic Relations Under Classical, Neoclassical, And Relational Contract Law’, 72 Nw. U. L. Rev., 854-905 (1977-78).